Buffett Bets Big on Health-Care with a Huge Buy

Super-investor Warren Buffett has made a big bet on Johnson & Johnson (NYSE: JNJ), adding more than 17.4 million shares to the portfolio of his holding company, Berkshire Hathaway (NYSE: BRK-B). His stake in J&J is worth about $2.4 billion at current prices.

The move can be seen as a classic Buffett "value" play: J&J shares, at about $58, are well off their 52-week high of $66.20 and are down nearly -10% for the year. The company has annual revenue of more than $60 billion and consistently earns returns on shareholder equity of between 25% and 30%. It has posted an increase in earnings for at least the past 10 years, and 2010 profit forecasts imply a +188.3% increase in net earnings since 2000. (Earnings have surprised to the upside for the past five years, according to Bloomberg.)

The J&J stake wasn't the only health-care bet made by the 79-year-old Buffett, whom Forbes lists as the second-richest man in the United States, with an estimated net worth of $40 billion, second only to Microsoft founder and close friend Bill Gates. Buffett also added to his stake in drug maker Sanofi-Aventis (NYSE: SNY) and to his position in medical-device maker Becton Dickinson & Co. (NYSE: BDX).

The Berkshire portfolio showed one other addition: Buffett added a 4.4 million-share stake in Fiserv (Nasdaq: FISV), which provides IT services to banks, an area Buffett is familiar with and likes -- three of his largest holdings are financial institutions: American Express (NYSE: AXP), U.S. Bancorp (NYSE: USB) and of course, the $8.2 billion stake in Wells Fargo (NYSE: WFC).

Fiserv offers predictable and "non-cyclical" earnings that are shielded from economic downturn. The company operates at a robust 23.5% operating margin. That's not as rich as the 39.2% operating margin at Moody's (NYSE: MCO), another Berkshire holding, though one that Buffett has started to pare in the light of potential liability for the company's ratings during the subprime ordeal. (Buffett stood pat on Moody's in the second-quarter, with a $685 million block of shares.)

The addition brought the total number of companies in the regulatory filing to 37. Berkshire also owns shares in several foreign companies, though it is not required to disclose those stakes.

Other portfolio moves:

Berkshire picked up a few shares of Iron Mountain (NYSE: IRM), which provides secure document disposal and storage services to companies. Buffett bought 205,200 shares, bringing the total value of the stake to about $176 million at today's prices. Expanding this position is part of a broader move to increase Berkshire's ownership of trash companies: Buffett has amassed a 10.8 million share hoard of Republic Services (NYSE: RSG), a move that has been mirrored by Buffett's close friend Bill Gates, who owns 55.4 million shares of the company through his private hedge fund, Cascade Management, as well as another 1.3 million shares through the Bill and Melinda Gates Foundation, which also owns 15.7 million shares of Waste Management (NYSE: WM). Though Buffett didn't add to Republic in the second quarter, I fully expect him to continue adding shares of this company.

Buffett shed shares of ConocoPhillips (NYSE: COP), which he bought during the run-up in oil prices and has said it was a poorly timed investment. The oil business is a curious area for Buffett, who tends to like businesses that require little additional capital, which is the lifeblood of growth and success for oil companies. He left his stake in ExxonMobil (NYSE: XOM) untouched, though at $25 million it is relatively minor -- the Conoco stake is worth nearly $1.6 billion.

Buffett also continued to pare his stake in Kraft Foods (NYSE: KFT). Buffett had a rare public disagreement with Kraft CEO Irene Rosenfeld over her decision to buy Cadbury. Buffett -- one of the largest holders of Kraft stock -- thought Rosenfeld was looking for a show horse deal and paid too much. (Buffett prefers work horse deals). Kraft, which announced its takeover bid for Cadbury in early September 2009, has more than doubled the S&P since, rising +11.3% to the benchmark's +5.3%. Berkshire, however, has gained +18.1%.

Action to Take --> Investors should mirror Buffett's J&J buy -- few companies are able to match its diverse and innovative product lines, and even fewer can generate the earnings of the health-care giant. Plus its shares are cheap. Buffett's wisdom has always been in spotting undervalued gems, and he couldn't give investors a clearer buy signal.